The newest threat to innovation in the U.S. is the increasingly local technology regulations. Small start-ups are increasingly have to work with dozens (and often hundreds) of regulators — and that means they will have to raise much more capital and slow their offerings to market.
It is now the fashion for individual states (and often counties and cities) to each institute their own and wildly different types of regulation on technology companies. The immense technology giants have the resources to deal with regulatory minutiae (in fact, they welcome the complex regulations because it further entrenches their power).
It is not regulation, per se, that hurts innovation. It is competing (and often contradictory regulation) that impedes regulation.
Historically, most technology has traditionally been regulated at a federal level.
But many markets outside of technology (from auto sales to car insurance) have been regulated by states … and some even by cities (think of zoning laws, rent controls, sales tax, and more).
For instance, markets like insurance have traditionally been regulated at the state level; those 50 insurance regulators make innovation very difficult because firms essentially have to create 50 different products — one for each state. In addition, insurance firms have to spend a large part of their time lobbying legislatures and worrying about upcoming elections that could be a systemic risk to their business. The productivity growth for insurance therefore is much lower than one would expect with software.
The same is true for cable companies, which were regulated at the city level and have to operate in thousands of different jurisdictions (some overlapping) within the U.S. This makes serving customers very difficult and is one of the reasons cable companies have had historically low customer satisfaction and low Net Promoter Scores.
Another thing that comes with regulation is corruption — especially at the state and local level. Many cities and states have endemic corruption problems because so much is riding on creating a law that benefits one company (or industry) over another. That type of corruption is much less likely at a federal level because the stakes are bigger and thus is much more scrutinized.
The internet is a fresh landscape where productivity growth is accelerating — partially due to the fact that most of the regulations have been federal. The tempo attracts smarter people who want to work on harder problems and not be curtailed by bureaucracy.Continue reading